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Is the minimum wage a good idea?

Analysis of the minimum wage in a western economy

A slight detour from the regular personal finance topics today. Instead, this is a general query as to whether or not the minimum wage is a good idea. To put it another way: is the minimum wage good for the economy?

Why do we have the minimum wage?

It is thought that businesses would deliberately exploit staff by paying them as low wages as possible. It is also considered that there are workers out there who would allow themselves to be exploited. Possible because they aren't skilled enough to work elsewhere or because they don't realise that they are being underpaid.

The minimum wage was introduced in many western countries in an effort to sort this problem. The thought is that by paying a minimum wage general living standards will rise which will result in happier populations. This sounds all well and good, with noble intentions but in practice economics isn't so static and there are interlinked and unintended consequences.

Unintended consequences of the minimum wage

What's the impact of enforcing a minimum wage on employers?

Wage bills can be large especially in the service and hospitality industries. When the government enforces such an act employers will see an increase in their every day running costs. This will result in a fall in profits and unhappy shareholders.

To solve this problem companies have two options open to them. They can either increase prices on products to make up for the lost profits or they can reduce the amount of employees that they have and squeeze more work out of a smaller work force. As you can imagine neither of these outcomes are particularly desirable.

A reduction in the workforce will see rises in national unemployment figures and wholesale price rises reveals itself in the inflation numbers. So whilst the government might have succeeded in increasing wages it probably won't have increased happiness in the population.

In particular, the potential increase in inflation will mean that the purchasing power of those increased wages diminish over time. So whilst a receiver of a newly installed minimum wage may believe that they have received a wage increase over time the rise in prices are likely to negate the benefits.

Final thoughts on the minimum wage

There is a final alternative. Even with its economic faults we accept the minimum wage for what it is. It boosts morale. It makes people think that they are receiving a wage increase. Surely this alone is a good thing?

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